Aug. 23 (Bloomberg) -- The Federal Deposit Insurance
Corp.’s list of “problem” banks fell in the second quarter for
the first time since 2006 as the industry’s income improved and
costs tied to bad loans eased.

The confidential list of banks deemed at greater risk of
collapse shrank by 23 firms to 865, the FDIC said today in its
Quarterly Banking Profile. The last time that happened was the
third quarter of 2006 before the credit crisis began, the agency
said. Net income rose 38 percent to $28.8 billion from a year
earlier, the eighth consecutive quarterly improvement, boosted
by a seventh straight drop in provisions for bad loans.

“Banks have continued to make gradual but steady progress
in recovering from the financial market turmoil and severe
recession that unfolded from 2007 through 2009,” Martin
Gruenberg, the FDIC’s acting chairman, said today in a
statement.

The FDIC defines “problem” institutions as those with
financial, operational or managerial weaknesses that threaten
their viability.

Lenders put aside 53 percent less money to cover bad loans
and charge-offs dropped 42 percent. The $20.9 billion decline in
charge-offs was the largest since the recovery in credit quality
began, the FDIC said.

In the Black

The deposit insurance fund, which protects customer
holdings up to $250,000 per account in the event of a failure,
was positive for the first time in two years, the agency said.

The fund, which had been depleted by a wave of bank
failures stemming from the collapse of the U.S. housing market,
rose to $3.9 billion, because of fewer expected bank failures
and assessment revenue, the agency said. The FDIC insures
deposits at more than 7,500 banks and thrifts.

The agency is prepared to deal with dismantling any lenders
that fail if the need arises, Gruenberg said at a news
conference in Washington, citing new authority granted by the
Dodd-Frank regulatory overhaul. The Dodd-Frank Act requires the
FDIC to craft regulations including the so-called living wills
rule, which would force systemically risky firms to spell out
how they can be unwound in the event of a collapse.

While loan balances increased, net operating revenue
declined for a second consecutive quarter, falling 1.8 percent
as banks struggled with the effects of a slowing economy and low
yields on assets. Net interest margins were lower than a year
earlier at nine of the 10 largest banks, the agency said.

Ducking for Cover

Investors have shunned bank stocks, pushing the 24-company
KBW Bank Index down more than 30 percent this year, on concern
that profit and dividends will be pinched by weak revenue and
demands from regulators that lender hold more capital to protect
against losses.

“Banks are ducking for cover partly because of market
volatility and partly because of there is no other way to comply
with the new capital and liquidity rules,” said Karen Shaw
Petrou, managing partner of Washington-based Federal Financial
Analytics Inc.

Twenty-two lenders collapsed during the quarter, the fewest
since the first quarter of 2009, the agency said. The FDIC
didn’t specify how the change in the problem bank list may have
been affected by failures or mergers. There’s no direct
correlation between the number of failures and the size of the
list, according to Andrew Gray, an FDIC spokesman.

“It’s a snapshot in time that includes some failures,
mergers and migration,” he said.

The agency did provide a tally of total assets held by
problem banks, which declined to $372 billion from $397 billion.